What will you do with your estate?

For parents saving for their own retirement, considering the children’s potential inheritance is a complication.

On the one hand, some believe in “dying broke” — as author Stephen Pollan wrote in Die Broke, the last cheque you should write should be to the undertaker and it should bounce.

On the other, some believe they should never eat into capital, living only on pensions and the income spun out from investment portfolios.

If you’re a young “waiter” — someone waiting for their inheritance — odds are you’d prefer parents in the second camp.

Most will be between these two extremes, finding a balance between providing for a comfortable retirement lifestyle for themselves, while leaving the kids a little something to compensate for the eventual loss of their parents.

If you think the kids should totally stand on their own feet, you may be partial to the SKI plan: Spend Kids’ Inheritance. Those leaning to this could “stiff the kids” using three main techniques: pensions, annuities and reverse mortgages.

The nature of all three is to maximize income for you and your spouse in your lifetime, while leaving little or nothing for those ungrateful heirs of yours. The classic Defined Benefit pension plan likely provides survivor benefits for your spouse but seldom for the kids once the second parent dies. In effect, the pension dies with the second spouse.

Same with annuities, although you can pay a little extra for features that will pay out an income to your heirs for a limited span of time. Of course, Die Brokers would never do that: they’ll want annuities that maximize the payout while they’re alive and which pay nothing upon their death. If they have RRSPs, when decision time arrives at age 71, they’d opt not to convert the RRSP to a RRIF but to annuitize.

Then, to complete the stiffing of the kids — who may have been hoping at least for the proceeds on the sale of their childhood home — you could take out a reverse mortgage, gradually sucking out your home equity in old age, the better to minimize the kids’ inheritance.

You may need to indulge in a bit of secrecy so the kids don’t catch on to how much money you’ve squirreled away. A recent survey found most American parents with more than US$3-million have not disclosed the full extent of their wealth to their offspring.

But what if you’re in the other camp and want to sacrifice your own cash flow and enjoyment of life in order to maximize your estate? Such saints of parenthood would do the exact opposite of the Die Broke strategy.

In the extreme case, they’d even take the commuted value of their DB pensions in order to maximize RRSP assets and ultimately their RRIFs. While RRIFs are heavily taxed on the death of the second spouse, there will at least be slightly more than half remaining for your heirs.

Naturally, your home will be free and clear before you die, because no inheritance-maximizing parent wants to leave the kids with any debts. You’d probably have a large whole-life insurance policy to further soothe their pain over your untimely demise. Or instead of a straight annuity, they might plump for an insured annuity, which combines the tax advantages of a life annuity with the tax-free death benefit associated with life insurance policies, says Jamie Golombek, managing director, tax and estate planning with CIBC Wealth Management.

And to cap it, why not pre-pay your funeral to really earn their undying gratitude?

But why even wait until death? Many believe in providing the kids an early inheritance while they’re still around to witness the children’s alleged gratitude. One could, for example, liquidate some non-registered investments in order to give the kids a down payment on their first home: why make them pay rent for a decade like you had to, when they could be building up home equity throughout their 20s?

Another good way to provide an early inheritance is to fund their Tax Free Savings Accounts once they turn 18. You can use your own money to do this but of course once the money is put in a TFSA in their name, it’s legally theirs. You might not want to give them 100% of the TFSA money. Tax guru Evelyn Jacks suggests making the TFSA a “teachable moment” by insisting they each put in $2,500 a year into their TFSA, at which point you’ll “match” the contribution dollar for dollar with an additional $2,500 a year.

Die broke and SKI or stint yourself so the kids won’t ever have to watch their pennies? Most will fall between these extremes. Wherever you fall, it bears discussing with your spouse, kids and a good financial planner or estate planning expert.

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